Is the economy improving or stagnating? Are businesses hiring or firing? Is the stock market a buy or a sell? Will monetary inflation prevail over debt deflation?
Quite honestly, we don’t know the answers to these questions. Nonetheless, we have some ideas on what we think the answers should be. More important than what we think, however, is what’s going on…and how it’s making thoughtful ruminations on markets and political economies such a muddled mess…
“We have Monetary Anarchy running riot, where the elastic band between the real economy and the current liquidity-fuelled markets is stretched further and further beyond credulity,” noted Bob Janjuah, head of tactical asset allocation at Nomura, earlier this week.
No doubt, things are going haywire. Just look around. Bubbles are inflating nearly everywhere. Stocks, oil, food, copper…you name it, all are going up. In fact, two days ago we paid $4.27 per gallon for gas. Yet, at the same time, the actual economy’s hardly improving.
Like Janjuah, we think monetary policy has something to do with it.
One Simple Question
On Wednesday, for example, the European Central Bank loaned out $712 billion (€529 billion euros) to some 800 banks. This was on top of the $655 billion (€489 billion euros) loaned out by the ECB to 523 banks in late December. That’s over $1.3 trillion in just two months.
Before we continue we must pause to consider a simple, yet critically important question…
Where did the ECB get $1.3 trillion dollars?
The answer, unfortunately, is so crude and rudimentary that just the thought of it will make a credit card fraudster blush. In short, the ECB made a notation in its ledger and – out of thin air – magically had the money to loan out to practically any bank that’ll take it.
By all accounts, this is remarkably deceitful. Yet, these days, it passes for enlightened monetary policy. Furthermore, this is not where the ECB’s fraudulent money stops; it’s where it starts.
The banks, in turn, will take the money and loan it out to European governments and businesses, perpetuating the cycle of escalating debt and financial instability. In addition, extreme market distortions, like $6 per gallon gas, will bubble up as markets and the economy are stretched ‘further beyond credulity.’
Everything that’s Wrong with Everything
Not to be outdone by the ECB, Federal Reserve Chairman, and central banker par excellence, Ben Bernanke, opened his mouth on Wednesday and told Congress, “The job market is far from normal.” But when he didn’t promise to print more money, investors sold stocks. The DOW dropped 53 points for the day.
Obviously, Bernanke can’t initiate QE3 with oil at $108 per barrel and the DOW near 13,000. Even so, we are confident that if oil prices continue to rise they will snuff out the economic recovery by summer. Then, when oil prices and stocks fall, and the economy sags, Bernanke will come to the rescue with more purchases of government debt.
Since late 2008 this has played out several times. In the process, Bernanke’s created over $2 trillion dollars from nothing and loaned them to the treasury. Surprisingly, he thinks by doing so he’ll somehow bring prosperity to the world.
These are the vagaries of directing an economy with a managed fiat currency. Anyone that hasn’t had their brain softened by years of academic study knows this is utter nonsense. Still, Bernanke and his cohorts across the planet are determined to keep printing money even if it ruins us all.
Clearly, these monetary exploits are a categorical example of everything that’s wrong with everything.
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Hard to see what else Trichet could say. If he admitted there was a problem it would opened a whole new can of worms and probably upset the markets to boot and the Qs would swiftly move to the next stage what next? a0I’m sure the ECB is unhappy about holding these bonds, most of which will probably have to be restructured ie a cut in principle and not just a lengthening in maturities. A real mess in the making!